Today marks the last major housing data we’ll get from the US this year, and given the performance of the markets lately, the state of the US housing market deserves a closer look.
We all remember the subprime mortgage crisis a little over a decade ago, so it’s understandable that investors will be a little sensitive to bad data from the US housing market. And, well, there’s been plenty to be concerned about, especially with the Fed tightening monetary policy.
What’s Going On?
Housing is a major factor in the economy, which often isn’t appreciated in its differential aspects. Housing, of course, contributes to GDP and is often measured by “residential fixed investment” (RFI) which accounts for spending on building and remodeling of homes.
This is about 3.5% of the GDP, so some people feel comfortable dismissing it as a relatively small driver of the economy. On the other hand, consumer spending on housing accounts for a third of the average family lifetime expenditure. Additionally, homeowners acquire an enormous amount of debt.
The issue of debt is the central concern. Since over 70% of homes are bought with debt, fluctuations in interest rates have an impact on homebuyers and owners. It’s not just that rising interest rates mean that potential homeowners have to pay more in interest, but it lowers the amount of money they can afford to spend on a house, putting downward pressure on house pricing, and by extension the market.
Many home builders have opted to try to increase the profitability of their investments by pushing to build and sell ever more expensive properties. Indeed, housing price inflation has not only outstripped inflation in the broader economy, but also wage growth.
Post-recession, median house prices bottomed out at $148K in March 2012 and have since been climbing at a steady ~6.5% annual up to $221.5K at the start of last month – and the expectation is that that they will continue to track a 6.4% growth next year. That’s almost double the ~3.4% expected real wage growth (in line with the last six months).
On the other hand, the 30-year average mortgage rate has actually fallen to 4.63% since reaching a 7-year peak of 4.94% in mid-November. In a similar vein, existing home inventories are at the highest they’ve been since May of 2011 (when accounting for seasonal variation), with 1.85M homes available for sale.
Mortgage delinquencies continue to be higher than credit cards, even though that gap has been closing since the financial crisis.
Part of the upset can be explained by the increase in multi-family homes vs. the decrease in single-family homes; people moving to cities to live in housing blocks away from single-family homes in rural and suburban areas. However, this is still a reflection of increasing house prices, and the market moving towards smaller, more affordable homes, being pressured by increasing land, construction and borrowing costs.
With younger people devoting a larger percentage of their salary to housing, this means they have less disposable income for other products. In that environment, the long-term trend of housing can bleed over to other areas of the economy.
As an echo of this drop in exuberance in the market, the November NAHB Housing Market Index came in line with expectations at 60, the same as the previous month – which had been an unexpected disappointment.
Generally, housing does well in the final few months of the year, but so far it’s been shaping up to be somewhat of an exception. Mind you, 60 still indicates a positive outlook, just not as positive as before.
Housing Permits and Starts
In those conditions, we’ll get November housing data, with stronger data seeing as supportive of the USD, and vice versa.
Housing Permits are expected to grow 0.4% to 1.27M, which would bring it back in line with the results in October, and still part of the downward trend seen since the peak in March of this year.
Housing Starts are expected to drop 0.7% to 1.22M, which would still be above October’s level. However, it would also continue the slump seen since the beginning of the year.
Some people have blamed the woes of the housing market on the Fed’s rate policy. It should be noted that even though the 30-year fixed rate jumps each time the Fed raises rates, the peak in Housing Starts was reached in April this year when the mortgage rate was at 4.7%. Even though the Fed raised rates subsequent to that, these were not translated into major jumps in the mortgage rate, showing people simply opting not to buy.
The segment of the market that has seen significant growth? Rentals. The US has the highest percentage of rentals in fifty years – but home ownership has largely remained stagnant since peaking before the 2008 recession (contrary to public perception, not many people lost homes they lived in during the recession). In other words, a lot of this construction is going into second homes for rental.
On the positive side, US developers like Lennar continue to make record sales, and total mortgage debt is still below 2007 levels (though that’s masking the demographic divide: urban housing debt is significantly higher than pre-crisis levels while rural debt is still at 80% of pre-recession levels).